Richard Moseley, Head of Global Transaction Banking, Corporates at HSBC talks to us on the most pressing issues in the treasury payments business – SEPA and expanding the supply chain.
Richard Moseley
Head of Global Transaction Banking, Corporates
What are the hot topics with your customers at the moment?
There are two things which are upper most in the minds of most people in the treasury payments business today. Firstly, the Single Euro Payments Area (SEPA) and its implications and secondly – and more broadly – the expanding supply chain.
Let’s take supply chain first as it’s a broader subject and one getting a huge amount of coverage at the moment. People have different interpretations of what supply chain means and today it seems everything is being classified as supply chain whether it is or not. The definition of supply chain has become so broad that it can cover virtually anything involved in the business; from sourcing raw materials to selling to the end user.
It has become very topical, but is there a good reason for this?
I think the reason supply chain is the focus of so much attention, particularly the financial side, is that large corporates are continually looking at how they can reduce costs. As part of that process, they’re looking at the cost of goods purchased, understanding the costs which their suppliers have to bear, how they can influence the size of those costs and consequently the size of the cost of the goods that they are purchasing. For example, if a vendor is selling to an entity with the ability to pay and a good track record, a bank’s view of lending to that customer is going to be markedly different to a customer selling to a new customer with no history or track record.
When we ask large buyers about their financial wallet, we are finding that we should look at it more broadly. We need to understand the financial wallet of each of the elements in the cost of goods sold, which may be paid by their vendors to banks earlier in the chain.
So it’s an area where treasurers are beginning to connect more with the commercial side, which traditionally would be predominantly involved in managing down the cost of goods sold and handling the supplier relationships.
Banks need a consultative approach to understand how a company manages its relationships with suppliers. How big are the suppliers and where are the suppliers based? What’s the confidence level of the relationships with those suppliers? What opportunities could there be for a bank, with a presence in the supplier’s location, to help create a more effective package for all parties?
Are you saying that we’re moving on from working capital management?
We used to look at working capital management. The next stage is to take a more holistic view, which means a company needs to understand supplier relationships to identify the impacts of changing your terms of trade to, for example, an industry best in class. We have helped a number of companies and their suppliers to do some modelling around this and it’s no surprise that this can have a huge impact on their balance sheet and working capital position.
Why are we talking about doing this now? What has changed?
It’s partly that the technology available makes it so much easier to get visibility of where the supplier is in terms of supplying the goods. As companies gain this visibility, they start to realise there are opportunities to reflect the fact that if they have a good, longterm relationship with a vendor client, then that’s got a value to the financier of that vendor.
The other thing is with the increase in global trade, there are more companies doing business across boundaries. The greater a bank’s understanding of the two counterparties involved with a transaction, the more they can do to optimise the cost for both parties. So for a local bank in Indonesia with no knowledge of the buyer, it’s difficult for it to establish whether that buyer is good for the money.
If, like HSBC, a bank has established relationships with big buyers principally in North America and Europe, as well as strong relationships with many commercial customers in Asia, the ability to structure something to reflect the value of the buying capacity is very important.
It’s a combination of growth and international trade, desire to take out cost, moving away from letters of credit (LCs) to open account and wanting to get as much certainty as possible in an open account environment.
I can see how that works if you’re taking out a local bank without the knowledge of the other end of the transaction. In simple terms, the big buyer leverages credit with its suppliers to get them cheaper finance, which in turn is reflected in a cheaper price for the supplier.
Correct.
Tracking the different stages of a supply of goods is still fundamentally quite difficult as there isn’t a commonly agreed system or set of standards in this space. SWIFT has started doing some work in this area recently, what are your thoughts on that?
HSBC was one of the 19 original banks which signed up for SWIFT’s Trade Services Utility (TSU), one of the methods helping to take paper out of the system. Removing paper gives greater visibility and the ability to utilise information more effectively, which I think will be a big step forward. The challenge now, however, is to get other banks and customers to move forward along similar lines. But I think there has been strong progress and hopefully that will continue.
HSBC is developing other areas, where we use technology to convert paper into electronic documents with bar codes attached. This removes the paper element, enabling companies to take out cost from the process, while speeding up the process.
What would you be saying to a treasurer who might not have done a lot of this to date, but understands the gains to be made from what you have just said? What would you be recommending?
We would recommend the treasurer gets together with commercial executives within their organisation. As a bank, we would want to understand how they are doing business today and if there is an opportunity to optimise how they’re approaching supply chain at the moment. Then we would undertake some scenario work to establish whether their terms of trade could be changed to best in class, for example, to then identify the financial impact on that company’s ratios. This could have a significant impact on the overall financial standing of the company.
You also wanted to talk about SEPA.
Yes, the major banks are all dedicating significant resource to understanding what SEPA will look like and, most importantly, how we can deliver value to both our clients and ourselves in the new environment.
Some recent figures from Capgemini indicate that volumes are increasing, but the direct payment revenues may come down 30%-60% of today’s revenues. That equates to around €13-29 billion, which is a huge sum of money. There are also estimates from McKinsey that it may cost between €80-150m for each bank to become SEPA compliant. I believe the range is actually going to be much broader than this, because it depends on a bank’s starting position.
It will also be interesting to see what SEPA prompts in terms of non-traditional competitors entering the payment space. Nontraditional competitors may begin to capitalise on opportunities to cherry pick niche pieces of business in this area, starting with a clean sheet of paper.
SEPA is really being driven by the European Commission.
The European Commission is keen to find ways to ensure lower pricing, greater transparency, increased speed, better information and enable individuals and businesses to benefit from fewer bank accounts. Like in the US economy, where all payments are treated as domestic, rather than having to think differently because a payment is going from one state to another. The Commission is a very powerful driver for change.
What’s fascinating here is trying to second guess the reaction in the market place to this fundamental change. Competition is going to increase because it’s going to become a volume game and therefore banks are going to be chasing the bigger players, pursuing increased volume.
Some small banks may have to exit the payments business as investment levels compared to potential revenue streams will become out-of-kilter. We may see some consolidation among banks, although this generally needs more drivers. I think we will see more outsourcing among those banks which can’t afford the investment, but need to find that capability, choosing to work with another bank to obtain that capability at a lower cost.
The trend of moving away from paper to digital will continue to increase as companies look at what can they do to take out cost. We will also see a focus on obtaining more value-added services. Payments will become increasingly commoditised as banks won’t see value in doing a payment per se. Banks will, at best, see recovery of cost, forcing them to offer other services on top, to provide value to the client and differentiate themselves, while profiting the bank. This focus on additional services will continue to grow.
Will the industry be ready by 2008?
Most banks will be. HSBC is committed to becoming SEPA compliant by 2008. It’s going to be quite difficult for some of the smaller banks, however. It seems to me that it’s going to be a scale game. The good thing for clients is there will be major focus on value added services, which is exactly where the European Union (EU) wants the payments industry to go.
What should a corporate be doing, other than sitting and watching?
There are a number of simple things corporates can be doing now. First, they should make sure they have Bank Identifier Codes (BIC) and International Bank Account Numbers (IBAN) for as many of their customers as possible. They should also recognise that paper and cash is going to continue to be expensive and that the better the quality of payments data supplied to their bank, the lower the payment cost is likely to be.s
Corporates also need to identify which banks are making the investments in value added services. Do they genuinely add value to them and are they priced accordingly? I don’t see corporates today needing to make large investments like the banks are having to. I think it’s really the banks which have the biggest challenge. But corporates need to make sure they are positioned to gain maximum benefit from those changes. They should continue to assess the banks in terms of what they are doing in a certain market and the likely winners. Ultimately, a corporate doesn’t want to invest time and effort in a bank, which is not going to be successful in that market place.
You talk about value-added services, what are they?
Much of it comes down to the level and usefulness of the information banks can provide. The value is working with a client to understand their transactions and then making them as straight through as possible into their systems. Then identifying areas which cannot be straight through and making these processes as easy to resolve as possible.
It’s providing the base information which is expected, and then taking it a step further to format that information so it can be manipulated and linked through to the customer’s process for dealing with suppliers. We look to identify whether we can provide support on the payable financing side, effectively helping them to use information to gain some of the discounts available.
By integrating the information on both the accounts payable and receivable side, in not just one country but several, a treasurer could potentially use the information to improve cash flow by capturing better discounts. There may be some way of making payments to the supplier earlier as part of a payable financing facility or maybe with an accelerated discount capability.
A lot of which could have been done without SEPA?
Oh absolutely. The point I’m making is that the focus on value-added services, which has been very visible over the last few years, will be increased as a consequence of the standard providing less earning potential on payments for the banks.
It’s the additional investment which is the value add investment. I think that if a bank has a big enough client base it can then invest some of those monies on that discretionary side. That’s also going to be driven by the market research that we do as a matter of course to identify where customers want to move. SEPA is just another catalyst for change – a big catalyst.
